Cheap Volt lease offers meant to drive more customers to Chevy showrooms this summer may have pushed that loss even higher. There are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce....

GM's quandary is how to increase sales volume so that it can spread its estimated $1.2-billion investment in the Volt over more vehicles while reducing manufacturing and component costs - which will be difficult to bring down until sales increase.

The EV companies are guilty of bad marketing. I recently leased a Nissan Leaf for local driving, mainly because it was extraordinarily cheap due to all the government subsidies. It is perfect for waht I wanted- an in town, commuting and business calls car. It's practically free to drive (the electrical cost is literally pennies per month), handles well, has plenty of pickup, and is generally a pleasure.

I have absolutely no allegiance to the green movement; this was strictly an economic decision and, in hindsight, a very good one.

But, of course, interpreting it that way would be confusing average cost with marginal cost. The articles makes this point clearly, but don't let that stop you from misinterpreting it:

Spread out over the 21,500 Volts that GM has sold since the car's introduction in December 2010, the development and tooling costs average just under $56,000 per car. That figure will, of course, come down as more Volts are sold.

It sounds that way because the article is written to make it sound that way. However, if you read further:

The actual cost to build the Volt is estimated to be an additional $20,000 to $32,000 per vehicle, according to Munro and the other industry consultants.

So GM is selling each additional car for more than the marginal cost of making that car. With enough volume, they would be able to recover their initial investment and start making a profit.

The loss per vehicle sold is a meaningless number. The fixed costs are already sunk. Those costs are important when you look back and try to decide if making this car was a good decision in the first place. They don't tell you much about current pricing decisions.

To get a car for $49K less than its production cost sounds like a pretty good deal.

Sounds like a good deal. But it's only a good deal if the production cost is actually commensurate with the product's value. That's a bit doubtful with GM. If they can only get people to buy their product at low prices, that suggests its real value is low. Also, when they have to lie about its capabilities, well, it sends a bad signal.

Yeah, right, Pennies per month? Either you were no math major or you are not driving the vehicle. Electricity costs averaged across all rate sectors are between 10.3 and 10.8 cents per kWh, according to the EIA. And if you are an urban resident, and probably are if satisfied by the short range of the Volt, you proabbly live in an area with residential rate more like 13 to 14 cents per kWh. There is no way it is costing you pennies per month.

In time the cost analysis of this debacle will include the fully loaded costs of development, including battery subsidies which were meant to facilitate the Volt. When those are included, my sources suggest a cost approximating $250k/car.

Well Hank and "Ignorance" I've had this same discussion--and heard the same arguments---from a friend who spent his career in the military helicopter business. If you've got high development costs spread over a small number of units, then the "cost" per unit is abnormally high.

But we are talking a commercial product here. Ultimately, if enough Volts are sold, the unit costs will come in line with the actual selling price.

As any lawyer might tell you, that assumes a fact not in evidence.

There's no assurance that the Volt will ever sell enough units to become "profitable" or even a break even proposition. 21,430 units made---5,000 of them sold to General Electric-The Bamster's "buddy" corporation. Production halted twice. Volts being leased in Detroit for $149 a month with no money down, and a two year lease. That's the economic lease price for a new $13,000 subcompact vehicle.

I doubt that the Volt will ever sell enough units to be "profitable".

That said, is it a good idea for "Government" Motors Corporation to make such a vehicle?

Well if you assume that the several billion dollar "investment" (to use Obama's term) or throwing money away (to use a more realistic term) will lead to advances in battery and powertrain technology useful for some practical car in the future, then maybe it's a good thing.

But in the meantime don't blow smoke in my face about this wonderful idea.

Senator Blutarsky: I wouldn't say that Reuter's analysis is faulty. If you read the article, the author clearly understands the distinction between sunk and marginal costs. But as Ignorance is Bliss points out, the article is written in a misleading way, burying the correct analysis deeper in the article. This leads to misinterpretation by people like Althouse who either don't understand the distinction between average and marginal costs or don't care about it if it gets in the way of their ability to make cheap ideological points.

Comanche Voter: Your analysis is perfectly reasonable. But your point is that the Volt won't make up its losses in volume, not that it can't. Of course it can, if it sells enough cars. Which is why Althouse's reference to the old joke about "volume" is so stupid -- the whole point of that joke is that you can't make up operating losses by selling in volume, which is true w/r/t marginal costs but false w/r/t average costs.

I'll check my utility bills again tonight, but I'm pretty sure that the electricity costs for the Leaf are under $20 per month (rates are low where I live and I charge at off peak times).

That is not to say any of this is a good use of Government money; it's not. Also, I am about the last person the Feds ought to be subsidizing for transportation costs, but since they're giving out free money (thanks, y'all, since it's your money) I'll take it, and when my lease is up see wht the market's like. I suspect both the Leaf and the Volt will be gone by then.

Please calculate the volume needed to break even on a vehicle selling at $40K that costs $32K to build in materials. And you are starting $1.2 billion in the hole.

Since I never said anything that in any way implied that I think they will break even, I'll just assume that you are asking me because you have such deep respect for my analytical abilities.

Based on the numbers you use, it would take 150,000 vehicles sold.If you use the $20,000 as the marginal cost ( the other end of the range cited in the article ) then they would need to sell 60,000 cars.

The article title is misleading and the writing gets convoluted when talking about costs. However, even when removing development costs, it appears that it still costs at least $59,000 to build a car selling for $39,000. Some of those costs would be reduced if volume increased and larger buys could be made, but others would not and actually might go up due to shortages (batteries for one.)

Another interesting dilemma with all electrics and hybrids is that the technology is changing fast. The technological depreciation is steep. I'm thinking of buying a Camry Hybrid (a former work colleague has one and it's great) but I'm worried about getting caught with a worthless, but expensive to keep asset once the batteries go kaput.

This is bull.If it costs GM $32,000 to just build the cars in Deetroit, they will never reach break even at $40,000 sales price in Coeur d'Alene, ID. There are a few other people who also need to make a profit between those two events.

Incidentally, the numbers I used are contradicted by other sources, which suggest the actual materials and labor costs are less than $39,000, with marketing and distribution costs being unknown.

So, yes, they could make a profit with volume. However, the actual sales and popularity belie this.

Part of the problem is price, but I do wonder if another part is the name: "Volt" suggests all electric, but it's a hybrid and has a practical range of about 375 miles. It's most comparable to a Prius and there it loses badly on price.

Joe hit on why the cheap leases GM is offering are such a risk; they have to make heroic assumptions about residual value for the math to work. But there is no history of used plug-in hybrid prices on which to base those estimates.

When the cars start coming off lease in 2014, look for the announcement of a large charge to earnings for lower-than-expected residual values. It would not be surprising to learn that money actually was lost on marginal Volt lease transactions.

Also, re: the discussion over break-even sales volume, bear in mind that dealers don't work for free - they claim a big chunk of the differential between the manufacturing cost and the sale price. And there is a cost of capital attached to the $1.2 billion in suck costs.

And just what demographic are you going to sell these Volts to, and for how long?And the $2,000 re-charging stations for their garages?What do the power companies and your local building department think about these developments?

Hank Shelton said...The EV companies are guilty of bad marketing. I recently leased a Nissan Leaf for local driving, mainly because it was extraordinarily cheap due to all the government subsidies.

-------------------Yes, but the problem is bigger than marketing.Unless companies expect endless bailouts and subsidies, it is foolish to expect them to build an industry or consumers and states to commit to them and the needed infrastructure...when it would all collapse when the subsidies go away.

I see you recognize that in a later post.Yes, take advantage of the system.But be very leery knowing that one day, what is propping up Green energy and green cars and 38 dollar a gallon biofuel for the Navy.......will go away if China stops lending us trillions or our leaders finally are forced to deal with the Debt.

With enough volume, they would be able to recover their initial investment...

Assuming worst case (usually prudent with GM and/or the Feds) that $32K is the correct marginal cost, GM would need a cumulative unit volume of 150K to break even...on the sunk costs for this model only.

Net loss to taxpayers, of course, at $7.5K EV tax credit/car sold, or up to $1.1B total at break-even in tax credits to people who can already afford a $40K car. That's atop the cap gains loss on the US Gov't equity stake (trading at $23, break-even at $53).

The problem the Volt has is marketing. It needs a whole new persona. We can start of with the name. Volt just doesn't grab the American car buying public by the testicles and tell them, "If you buy me, you will have lots of sex! And money! Money's good too!"

Under normal times, a portion of the R&D costs for a vehicle would be amortized based on projected sales. For example, if you spent $1 billion to develop the car and projected to sell 100,000 cars over the coming years, then you need to add $10,000 to the price of each car to cover the R&D costs (not counting the cost of the money for R&D). If you project to sell more cars then the per-car cost would be less.

Of the $49,000 (give or take) price of a new Volt, how much is the actual cost to produce the car? How much goes to cover R&D costs? How much goes to other things like UAW employee health benefits (reportedly over $1000 per car GM sells)? If they're having to sell the car from what it actually takes to build it, you've got a problem. If they have to sell it for less than the full cost (all factors considered), then they have an even bigger problem.

Designing and building the Volt is something GM would never do on their own. It's a condition for getting Government bailout money (which would be very interesting to know just how much that amounts to so far - with something approaching honest accounting) and a payoff to the Greens in order to get them to go along and vote for the UAW bailouts.

" With enough volume, they would be able to recover their initial investment and start making a profit."

That's true.

But with the Volt selling just over 1000 units per month, in a market where 15,000 doesn't even get you into the top 20, that could take 25 years, assuming that Chevy won't have to do any R&D or invest anything into the Volt in that period (LOL)...

So in order for the GM unions to get our tax money they had to promise to waste more money and time doing this project. Usually when you bail someone out you require they act smarter not dumber, but government doesn't value responsibility like most capitalists.

'Ignorance is Bliss' has it perfectly: so long as GM can sell the car for less than the marginal cost, it makes sense to do so. Assuming that "marginal cost" includes the present value of current marketing and projected warranty and liability costs, of course.

A larger problem is that the high cost of ownership will limit its sales to those who are more interested in making a statement than in buying transportation.

Two possible solutions to this are:1. Even larger government subsidies to the buyer, or2. Provoke another oil boycott- with restricted petroleum supplies, the owner of an electric car becomes king of the road.

If you have that much money to spend on a compact car with a mundane Chevy badge, then you really are not worried about the price of gas.

If you can only afford a small care that gets great mileage, then you are not looking at the Volt.

The market for these cars are folks who get to preen about how "green" they are. Not regular folks who need to commute to work.

My previous car was a hybrid -- purchased before they were priced out of my range. It was a great vehicle. I did the gas mileage math on a new version of the same ride and I would have to drive it 10 years to make up the mileage difference between a regular engine model of the same vehicle (was three years on my old one) That is bad math.

In the end I replaced my Ford escape hybrid with a V-6 version of the same and saved $10K.

It is all very interesting technology, but still not good enough and economic enough for mass use.

I wonder what the relationship of sunk costs to sales revenue was for the Prius at a similar interval of time after introduction? I'll bet the rocket surgeons in the federal government wonder, too. Or do you suppose they actually checked into that? Subsidizing production as opposed to R&D is always a lousy investment of our taxpayer dollars. True for EVs, wind turbines that haven't been economically feasible for the last 40 years, or for solar heliostats that even the Spanish have backed away from, or solar cells that still don't make sense outside niche markets and special circumstances.

Seriously, how the fuck do you get that glorified Cruze to $89k in production costs, when I owned a 2005 Mercedes E55 AMG wagon with handbuilt drivetrain that stickered at $92k, and later had a Porsche Cayman S "Design Edition" loaded up with lovely boutique options that stickered for $82 and I paid about $60k for, NEW, from a dealer??? The Merc and the Porsche were both top-of-line specialty models; the Volt is essentially a glorified Corolla-level compact sedan. How does this compute? Prius' are maybe $30k cars; what the hell is with a direct competitior that's not a Bugatti that costs $89k just to build, never mind marketing costs, dealer markups, etc. that exist in a sane world?

GM is totally fucked if this is how they define "global competitiveness". If this is true, no amount of "jobs saved" language should spare the administration the savaging they deserve for allowing this idiocy to continue unchecked.

The Volt falls into another expense category. Maybe something like "marketing + subsidy-enhancing + future technology". The accounting folks must find it difficult to break down. The Volt is a spectacular failure, despite all the cheerleading, but it might encourage people to think that GM is leading the way and that the federal government is a positive vector there. People in Michigan and around there might think the Volt is great because it keeps them employed. Many people probably think the Volt is great because without it, we'd never have electric cars.

GM's quandary is how to increase sales volume so that it can spread its estimated $1.2-billion investment in the Volt over more vehicles while reducing manufacturing and component costs - which will be difficult to bring down until sales increase.

The Volt wasn't intended to be profitable for its first decade or so. It does allow GM to sell more large crossovers without penalty under the new CAFE rules. They do make money on those. Before the bankruptcy, GM made money *only* on its large pickups and SUVs, which are averaged separately under CAFE.

By the end of next year, they will be selling a small Cadillac coupe with a similar drivetrain that will be priced much higher. If you google Cadillac Converj, you can see pictures of the concept, which is very stylish. The production version, called ELR, has only been photographed with camouflage.

Don't know enough about the car industry to know how one properly allocates fixed costs, however the troubling comment in the article was, " . . . Cheap Volt lease offers . . . have some Americans paying just $5,050 to drive around for two years in [the] vehicle."

While I agree with your larger points, w/r/t . . . . "When the cars start coming off lease in 2014, look for the announcement of a large charge to earnings for lower-than-expected residual values. It would not be surprising to learn that money actually was lost on marginal Volt lease transactions."

The overall magnitude of the loss-write off won't even merit a an asterisk.

You're arguing the marginal utility of what is essentially the American version of the Trebant.I think your time could be better spent elseware.If you amortise the balance of what GM still owes the taxpayers into every Volt...............ah screw it.

Ben, think about it before you reply. Sure, you might be able to say "I didn't buy three Volts", and that'd be right impressive. But some day some young squirt will come along and say "well, I didn't buy four", and then what will you do? You'll have to face him and say "five". And he might beat you.

This is what happens. You think you're the best, and someone better always comes along. Don't buy all the Volts you can now, son, while you can, 'cause...

Your right; I should have been more careful and described the prospective residual charge as large relative to such profits as may be booked on those lease transactions, but as you correctly point out, a rounding error at best on corporate-wide results.